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India Central Bank Chief Meets Jaitley as Rift Widens

(Bloomberg) -- India’s finance minister and central bank governor faced each other at a scheduled meeting on Tuesday as tension mounted over the Reserve Bank of India’s push for more independence.

Finance Minister Arun Jaitley held a regular meeting of the Financial Stability and Development Council -- a high-level panel of financial market regulators -- which Governor Urjit Patel and his deputies attended.

The RBI under Patel has been pushing for more powers to clean up a banking system that’s saddled with bad debts. On Friday, Deputy Governor Viral Acharya gave a frank speech defending the independence of the central bank, saying its autonomy would be strengthened by having regulatory control over state-run banks.

With elections looming next year, Prime Minister Narendra Modi’s government is keen to ensure banks continue lending as risks from rising oil prices and a currency slump curb prospects for Asia’s third-largest economy.

Shadow Banks

The financial stability panel dealt with the fallout from the debt default from a systemically-important shadow lender that raised the risk of contagion in the economy, a government official told reporters in New Delhi after the meeting, while asking not to be identified citing rules.

The central bank should ensure sufficient liquidity in the system and prevent a spillover of the defaults by the Infrastructure Leasing & Financial Services Ltd. into the wider economy, the official said.

The official cited the RBI as saying it has taken a balanced view on policy rates, and that there was no liquidity crunch among shadow banks. Also, inflation was under control, according to the central bank.

The meeting was held in a cordial atmosphere and there was no discussion on the rift between the RBI and the government, the official said. Governor Patel didn’t take any questions from the media after the meeting.

So far the government hasn’t responded officially to Acharya’s comments. In a speech on Tuesday, Jaitley criticized the central bank for its past actions, saying it “looked the other way” while banks were allowed to lend indiscriminately in the aftermath of the global financial crisis.

Former finance minister Palaniappan Chidambaram urged the government and the RBI to work out their differences behind closed doors rather than publicly.

“It will be best if the RBI and the government don’t talk across each other through lectures,” Chidambaram told reporters. “It might be better if the time-honored practice of the finance minister and the governor of the RBI meeting often in private and talking issues.”